Asset Protection Trust

Asset protection trusts are typically found outside of the United States. The essential features of an offshore asset protection trust are: 

1) The use of trust protector, which is an office that overlooks the trustee.

2) An event of distress clause, which provides that the trustee must disregard any instruction from the trust protector or the settlor in the event of some event of distress. An event of distress is usually some judicial order to repatriate the trust assets to the United States because a creditor has gotten a judgment against the beneficiary and is trying to exercise that judgment against the property.

3) A flight clause that authorizes the trustee to repatriate the trust assets from one jurisdiction to another if there is a significant possibility a creditor can reach the trust property.   

Consequently, some states have created statutory exceptions to this general rule that allows people to utilize particular types of trusts to create asset protection for their assets. These are known as “Domestic Asset Protection Trusts” or “DAPT’s.” However, California Probate Code Section 15404 explicitly states that it is against the state’s public policy to recognize DAPT’s.

Notwithstanding, There are three common types of third-party asset protection trusts allowed under California law: spendthrift trusts, support trusts, and discretionary trusts. 

The Spendthrift Trust

California Probate Code Sections 15300 and 15301 states that a California trust can provide that a beneficiary’s interest in the income and principal of a trust cannot “be subject to voluntary or involuntary transfer.” 

The idea behind this provision is that a beneficiary cannot assign their interest in a trust to a third party, including a creditor.

The Support Trust

California Probate Code Section 15302 provides that a trust that explicitly provides a beneficiary’s education and support cannot be reached by the beneficiary’s creditors, at least until the trust’s assets are distributed to the beneficiary. “Support” can include support for the beneficiary and the beneficiary’s spouse and minor children. 

The Discretionary Trust

California Probate Code Section 15303 authorizes explicitly discretionary trusts. A discretionary trust gives complete discretion to the trustee to decide whether or not to distribute any income or principal to the beneficiary: the trustee may give all of the trust assets to the beneficiary; none of the assets of the trust to the beneficiary; or any amount in between.

To Sum up, the Asset Protection Trusts

Domestic APTs

Domestic asset protection trusts offer the most flexible asset-protection trust laws in the United States. Should you decide on using one, you may set it up quickly and easily in states that permit them—presently, only 17 states: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. However, as these trusts become more common, more and more states recognize their legal status.

Domestic trusts’ biggest downside is that your assets still reside within the U.S. legal system, which puts them at the risk of court orders, like liens or judgments, federal bankruptcy laws, and various state laws. Moreover, domestic APTs are new, and as such, they lack the credibility of demonstrated case law; which could prove devastating were there a lawsuit or judgment against your estate.

Foreign APTs

Foreign asset protection trusts are also known as “offshore” trusts because they’re often held in an offshore account. These trusts are established in jurisdictions outside of the U.S., such as the Cook Islands and the British Virgin Islands. Although they are usually more costly than their domestic counterparts, foreign asset protection trusts have more stringent privacy measures than their U.S. counterparts, offering even more effective protection for your assets. Another benefit is that jurisdictions that promote themselves as offshore tax havens usually do not enforce U.S. judgments against assets of trusts formed in their jurisdictions.

Asset Protection Strategies Beyond the Use of Asset Protection Trusts

Although California limits asset protection trusts to the benefit of third parties, California does allow for other asset protection strategies that can protect a person’s assets. These include Limited Liability Companies (“LLCs”), corporations, professional corporations, liability insurance, and retirement plans such as IRA’s and private retirement plan trusts. 

Although other states such as Nevada, Delaware, and Alaska, have better reputations than California for asset protection, there are still many opportunities for asset protection strategies directly recognized under California law. Engaging in estate planning presents an excellent opportunity to explore the possibility of maximizing the full potential of trusts and other legal instruments that can provide a significant degree of asset protection in various circumstances.

Conclusion

Asset protection can be a complex process that depends heavily on the rules and regulations of the particular jurisdiction in which the process occurs. Furthermore, any mistakes or errors in the process can leave your assets unprotected and vulnerable to adversarial processes such as litigation and regulation. The last thing you want is for your assets to be open to being taken by Third Parties due to some error or technicality that exists because the process was not engaged in properly by a professional that has extensive experience with the process. For this reason, it is almost always recommended to obtain the help of a professional when seeking asset protection.

If you are looking for an asset protection attorney in California, our Trust-based asset protection strategy with Irrevocable trusts and Spendthrift trusts is an easy way to accomplish that. Steve Bliss Law is a passionate asset protection attorney that is more than capable of preserving your family’s wealth. Feel free to schedule a consultation right away, either by calling us or using the contact form on our website available below.